Two years after Maker Studios co-founder Danny Zappin was ousted as head of the online video firm, a group of former and current executives at his new venture, Zealot Networks, is trying to acquire the branded content company and replace him as chief executive.
Zealot co-founder Robert Vanech, the firm’s former chairman and chief financial officer, said he had approached Zappin about the deal and was seeking the backing of private investors and a publicly traded media company to back the bid.
“I’m leading a former management team to buy back the company and infuse it with equity,” said Vanech, who added that the plan is to offer Zappin a board seat but to have him step aside as chief executive and possibly shift to another active role at the company.
Zealot spokesman Ross Johnson said in a statement that “Zealot Networks has not had any negotiations regarding any buyout offer for Zealot. … We have begun preliminary discussions with multiple parties about new equity investment and are willing to consider offers from additional credible parties. … If and when Mr. Vanech and any investors he’s talking to do make a credible offer for Zealot, the offer will be considered at that time.”
The takeover interest comes on the heels of financial difficulties faced by Zealot over the past year, said Vanech, who left the board in April. According to him, Zealot was on the brink of breaking a covenant on one of its loans before his departure, which would have put the firm in default with the lender.
Vanech also said during his tenure that several executives under the firm’s umbrella went without pay, though Zealot disputes that claim.
Zappin is the only one of the firm’s four co-founders still working at Zealot, according to LinkedIn. The other co-founders did not respond to requests for comment, nor did the directors listed on the company’s most recent Form D, filed in July 2015 with the Securities and Exchange Commission.
Rapid rise
After raising $26.5 million in venture capital and an additional $30 million in debt financing in less than two years, Zealot turned heads by acquiring 17 companies – a mix of online creative firms, talent, and marketing agencies, which were brought into the fold to offer a one-stop shop for advertisers looking to create digital content.
Perhaps the splashiest of the deals was a $100 million purchase of online content aggregator ViralNova in July of last year. That move was quickly followed a month later by an $85 million acquisition of video syndication platform Allscreen. Each transaction involved a mixture of cash and equity.
Executing a rollup strategy can be an expensive way to grow, especially if the acquiring company has difficulty integrating its new entities, said Jacob Carlson, a manager at West L.A. consultancy Manatt Digital, who was not involved in the Zealot transactions.
“It’s really hard to do and hard to do well,” he said. “Companies will spend the time upfront on strategy and due diligence, but that integration part sometime gets left behind.”
One local media executive familiar with the firm’s operations said his view is that Zealot is a mess operationally.
“The companies they were acquiring didn’t fit synergistically,” said the executive, who asked not to be identified.
Ups, downs
While Zappin’s career has seen plenty of success, there have also been stumbles. After a stint as an actor, he received a two-year prison sentence in California following a federal narcotics conviction in 2001.
He came up with the idea for an online talent agency in 2009 built around YouTube, then just a growing streaming video site. The idea became Culver City’s Maker, co-founded with then girlfriend Lisa Donovan, her brother Ben Donovan, and Scott Katz to represent a vast network of popular YouTube creators to advertisers. Zappin was its chief executive.
The startup quickly grew into one of the industry’s most successful multichannel networks on YouTube and attracted $66 million in venture capital to help it scale further.
But as high-profile venture capitalists sniffed around Maker, some became uneasy with Zappin’s felony conviction and requested that he step down as chief executive before putting in money, according to a 2013 story in The Hollywood Reporter.
Though he initially agreed to step down as chief executive in April 2013, Zappin filed suit in Los Angeles Superior Court two months later, alleging he was unfairly coerced to leave the position. The case was dismissed last year.
In March 2014, Maker reached a deal to be acquired by Walt Disney Co. for $500 million, with more cash to come if certain benchmarks were met. Zappin sued in Los Angeles Superior Court to block the transaction. The case was thrown out. It has been reported that Zappin earned $25 million from the sale.
The same month that Maker announced its deal with Disney, Zappin co-founded Zealot with Vanech.
“I put in the first $333. He put in the first $667,” said Vanech, who claimed he was once the second-largest shareholder.
The startup’s initial investors included more than 15 former Maker employees, talent, and executives, according to a press release at the time. The firm also raised a $26 million Series A round in August of last year from investors such as Accelerate-IT Ventures, ITV, and Venture51. It has also borrowed about $30 million in venture debt over several rounds, including $5 million from Breakwater Investment Management, $5 million from City National Bank, and $20 million from White Oak Global Advisors, according to Vanech.
“The Breakwater and City National loans have been paid in full,” said Zealot spokesman Johnson. “Additionally, we are working constructively with our remaining lender who believes in the long-term potential of the company.”
Rebooting
As the business grew, Vanech said, it accomplished a great deal. But, he added, it also paid too much for accounting, legal services, and the salaries of some executives at acquired companies. Things got shakier last year when Zealot saw lower-than-expected cash flow from its acquired units. It was at that point, he said, the company asked a number of executives to go without pay.
Vanech left as chief financial officer in December and resigned as chairman in April. He said he remains on good terms with Zappin, but said his departure stemmed from disagreements he had with financial advisers hired by Zappin.
Vanech said the buyout group he is putting together includes Brett Johnson, former managing director of Zealot’s technology and content division, and several current employees, whom he declined to name.
Johnson said he had expressed support for but hadn’t played an active role in a deal led by Vanech.
“I’m not close enough to it to understand exactly what they trying to pull off in terms of the capital stack,” he said. “I’ve got a great deal of respect for Bob. If anyone is going to pull something off, it’s him.”
Vanech said he is in talks with several institutional backers to help finance the deal.
“The bottom line is this: We are making an offering to protect the shareholders and Danny is the largest shareholder. He and I are aligned,” he said. “My intention is to work with Danny and the shareholders to get this deal done.”
